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With asset protection planning specific strategies aim to protect your financial assets and possessions from a variety of potentially harmful risks. Typical among these are: lawsuits, creditors, bankruptcy, stock market fluctuations, low interest rates, catastrophic health care costs, probate, excessive taxation, auto accidents, home fires, floods, and so on. Left unprotected, assets can be impacted negatively in many cases and depleted entirely. In estate planning strategies are implemented to protect estate assets from the costly probate process and from unnecessary estate taxation. The goal is to ensure that you will leave the legacy you envisioned and worked so hard for.
 
Protect What You Have Earned
It is commonly held that the odds of having to file a Homeowner’s Claim are 1 in 88. So, too, the odds of having an auto accident are 1 in 47. We routinely insure our homes and automobiles against these risks even with the relatively minimal probability that something of this sort will take place.
 
So…doesn’t it then seem prudent to protect against a risk that has 100% probability?! Indeed, estate assets are nearly always subject to probate. Even a relatively modest estate consisting of a home and unprotected savings or investments can prove costly to administer, can take months to move through probate court, and can result in the court and lawyers deciding the disposition of the estate’s assets. Isn’t it far wiser to make use of current law in behalf of our families? Why let assets be taken from the estates you worked so hard to accumulate?
 
I Have a Will – Why do I Need Further Planning?
With a Will you name the beneficiaries (individuals, trusts, or charitable organizations) of your assets at the time of your passing. Also within this document you may: name the person (executor) who will administer your estate in probate, name a primary guardian for any minor children, and provide instructions regarding other issues such as those, for example, concerning your extended medical care in the event that you are unable to communicate your wishes. Of course having a Will is certainly better than having no plan at all. Unfortunately, a Will alone does not provide enough protection to avoid probate proceedings…and even with a Will the details of your estate will become part of the public record.
 
What is Probate?
The dictionary definition of probate is: a court procedure for settling the personal and business affairs of a decedent by formally proving the validity of a Will and establishing the legal transfer of property to beneficiaries, or appointing an administrator and supervising the legal transfer to property to heirs if there is no valid Will. In other words, probate is the state-mandated process in which a probate court judge passes final judgment on and makes changes deemed appropriate in the settlement of an estate.
 
Probate can take a year or longer to complete. Probate involves trips back and forth to court, costs thousands of dollars in attorney fees and court costs, and may result in the additional loss of assets due to unnecessary state inheritance and federal estate taxes. Legal and court fees typically range from 3% to 7% or higher across the nation depending upon locale and the specifics of each estate situation. Using the median rate of 5%, for example, an otherwise unprotected estate of only $300,000 could incur probate costs of $15,000 or more.
 
Studies show that nearly three out of every four people who die each year in the United States have neither a Will nor an estate plan. While reasons vary, most often people have procrastinated. Perhaps they are unaware of the consequences. Perhaps they simply don’t want to think about end-of-life issues. Without proper planning, a family’s grief is compounded when the deceased leaves their family with the burden of managing the estate, dealing with courts, and possibly owing large sums of money. Finally it is common that these issues to strain family relationships, often leading to negative discourse and feelings among family members.
 
For those who have children, planning becomes even more important.  Just imagine when both parents die and have no plan in place, their child becomes a ward of the state with custody left to the courts to decide. In some cases the child may be placed in the care of a guardian who may not have been favored by the parents or who may not be in the best interest of the child.
 
Estate = Possessions
When many of us to hear the term “estate” we dismiss it as something associated with the very wealthy. It then follows that any suggestion of “estate planning” is also reserved for the wealthy and not a concern for those of us with more modest assets. These assumptions are incorrect and dangerous to our financial well being. Anyone who has accumulated financial assets, real estate or other possessions of value should consider the benefits of estate and legacy planning and the possible consequences of a failure to plan.   
 
Our estates consist of our financial assets and possessions. Usually our home is our greatest asset. Often small business owners have the bulk of their estates represented by their business. Other assets may include vehicles, collectibles, personal property, savings and investment accounts, other real estate including “time shares”, business interests, inventory and equipment, and more.
 
All of these assets are subject to probate and unnecessary taxation unless prior steps are taken to protect them. We can easily protect our family from the costly and public “trial by probate.”   We can avoid unnecessary taxes if we do some basic planning. It’s simple, and should be done sooner rather than later. Once a death or disability occurs, the opportunity for protecting assets can be lost entirely.
 
Waiting to plan can be costly and even. And too often families learn too late as the example below outlines:
 
EXAMPLE 1:
 
Janet and Jim are married and have two children. They own a home, a car, a truck, and a camper. Jim has a 401(k) retirement plan where he works, and other savings and investments.
 
Janet and Jim are busy people, as we all are. They drafted a Will ten years ago to make sure their children’s guardian was set and that beneficiaries were named in case something happened to them. However, ten years ago they were renting their home and had only one car. Since then they purchased a new home and added the truck and camper. They had not updated their estate plan to reflect those additional assets.
 
Unfortunately, Jim contracted cancer. He failed to update their planning until he was on his death bed. Thus his estate plan was not implemented before he died and his entire estate (valued at over $500,000) had to go through probate. Probate fees and related estate settlement costs exceeded $20,000. Even though their estate was below the taxable amount of $675,000 for state inheritance tax purposes and below federal estate limits, Jim’s heirs will be able to take advantage of Janet’s estate exemption value only in the future. In sum, additional estate taxes and less inheritance for the children may result.    
 
To make matters worse, the family was presented an estate in utter disarray, with no instructions as to how to proceed, and with nothing in the way of legacy communications from Jim. This scenario is often referred to as “post mortem” planning, consisting of stress, fear, and confusion, and requiring considerably more expense to settle the estate. All this could have been avoided if Jim had updated his estate plan on a timely basis.
 
EXAMPLE 2:
 
Fred and Rose are the elderly owners of a long-time farming operation. Their holdings include the home farm and two adjoining farms acquired some years ago. They have two married sons. James is 51 and Fred, Jr. is 54. both sons work an adjoining farm and help out with the home farm. In his second marriage, James has children from both marriages and his present spouse. Fred Jr. and his wife have one disabled adult child who receives government disability benefits.
 
Fred and Rose are in their upper 70s. Fred’s health has been deteriorating over the past several years due to heart disease. Meanwhile Rose has been showing early signs of Alzheimer’s . Fred and Rose have an old Will but have done no additional planning. Their estate has been valued at over $5 million.
 
If Fred and Rose were to die in the next two years, these are some of the issues that could arise:
  • Instead of $4,000,000 being passed to their sons without federal estate taxes, only $2,000,000 would pass untaxed.
  • The federal estate tax rate on the unprotected $2,000,000 would be nearly 50%: $1,000,000.
  • State inheritance taxes could approach $100,000 and higher.
  • Using the median probate rate of 5%, probating the estate may cost $200,000 or more.
  • Settling an estate of this size and complexity could take 12 to 18 months.
  • The private lives of all three families would become part of the public record for any and all to see.
  • The disabled son could become disqualified for government disability benefits.
  • The issue of his, her, and their children for Fred Jr.’s family could become problematic.
  • The potential battle for assets among the families could be intense possibly resulting in a contested Will and strained or severed family relationships. Much stress and substantial legal and accounting expenses are a given.
  • The cash to pay legal fees, probate fees, and estate taxes could require mortgaging one or more farms or even liquidating assets.
  • The avoidance of effective estate planning means the unfortunate and unnecessary demise of a family business built from hard work and sacrifice over multiple generations.
  • A lost opportunity for continuing a family legacy and creating a new chapter to benefit succeeding generations.  
All of these issues could have been prevented with proper planning and with the adoption of other estate preservation strategies. Indeed for a fraction of the ultimate cost to settle the estate the estate could be carefully guarded. Whether relatively modest or substantial estates, planning can provide the means for protecting and preserving your estate and can proved the opportunity for establishing the legacy you have for your family and heirs.
 
Estate Taxes
Two types of estate taxation exist. The federal estate tax is a transfer tax that an estate may be required to pay before it can be distributed to its heirs and beneficiaries. At present the maximum estate tax is 50%. This amount must be paid in full before the estate can be further distributed to heirs or beneficiaries. In effect, this can mean that estates must be mortgaged or even liquidated just to raise the cash necessary to pay estate taxes. In addition, states can impose an inheritance tax. While usually this is a lesser amount never the less the amount must be added to the total reduction of estate assets through taxation. A typical state exemption value is $675,000 per individual.
 
The estate tax takes into account all financial assets and possessions owned by the individual prior to death. This includes the individual’s home, business interests, bank accounts, investments, personal property, IRAs, retirement plans, and death benefits from life insurance policies payable to or owned by the estate. An estate tax return for a U.S. citizen or resident is required only if the gross estate exceeds the applicable exclusion amount. The exclusion for 2006-2008 is $2,000,000.00. This amount increases to $3,500,000.00 in 2009 and is scheduled to be repealed in 2010. Meanwhile, it is likely that new laws lowering the exemption will be enacted before that time.   
 
Why is Planning Important?
  • Because we care about our families and what happens to them.
  • Because we wish to make known our wishes regarding how we want to be cared for in the event of an incapacity, thus sparing our families this burden.
  • Because we wish to leave one of the most valued gifts that our heirs can inherit… perhaps more valuable and enduring than the cash and possessions they may receive: a lasting legacy for those we love.
Begin Planning Today
  • The first step is to talk with a trusted advisor … an accountant, financial planner, or insurance agent.
  • Then consult with an estate planning attorney who will work with to fashion your legacy plan and to draft the necessary legal documents required to carry out your wishes.
  • Specific needs may require advanced estate planning. Nevertheless, the documents listed below are commonly used by attorneys and are included in TASC’s estate planning service LEGACY guard.
Typical Legal Documents Involved in Estate Planning
 
1. Revocable Living Trust
The R evocable Living Trust is a legal document used in estate planning. This document permits the management and control of property without owning it. Assets titled in the name of the trust need not be submitted for probate court administration and thereby avoid probate fees, avoid lengthy delays with estate settlement, and avoid the publicity of probating the estate. The trustees (persons who established the trust) are typically spouses who are initially established with successor trustees who are named to act in certain situations. The plan for distribution of estate assets can include special wishes or provisions affecting family members, including the guardianship of minors. Because it is deemed revocable, any part or all of the provisions can be changed during the lifetime of its creators, or “settlors” as they are often called.
 
2. Pour-Over Will
The Pour-over Will is a particular type of Will. Used in conjunction with the revocable trust, the Pour-Over-will is used to “catch” any property that has been intentionally or inadvertently left out of the trust. This provides for property which must be ultimately distributed through the trust directives. It also addresses inheritance issues and other legal authorizations and directives.
 
3. Durable Power of Attorney
The durable “financial” power of attorney is the document that authorizes someone to act in behalf of another for financial matters in case of incapacity or disability. Without this authority, the court must name someone to act in this capacity.
 
4. Health Care Power of Attorney
The Health Care Power of Attorney is the document that authorizes someone to act in behalf of another in case of incapacity or disability regarding medical decisions. Often within this document are found the “advance directives” (living Will) which detail the medical treatments one wishes to receive or not receive. As such should communication be impossible under certain circumstances courts typically become involved if this document is lacking. This can be very costly and can take years to resolve.
 
5. Disclaimer Trust
The Disclaimer Trust is a document which formally states that no one will receive assets. As such, unnecessary state inheritance or federal estate taxes are avoided. Typically a surviving spouse disclaims assets beyond an amount which would otherwise be subject to taxation and as such unnecessarily deplete estate assets.

Peace-of-Mind
It’s easy to put off until tomorrow what seems like an impossible task. Do yourself a favor. Don’t be dissuaded by an issue that may seem complicated. For most people, the planning process can be relatively easy and relatively inexpensive. Add to that the satisfied feeling of finishing the planning. Will peace-of-mind free you to concentrate on living your life with your legacy plan now in place?